As is the case with many countries, Sri Lanka has had various legislation from time to time restricting foreign ownership of land. The most significant of them all, is the present legislation in the form of the Land (Restrictions on Alienation) Act, No. 38 of 2014 (as amended) (“the Act”).

The Act has been introduced primarily to restrict foreigners, foreign companies and entities with majority foreign shareholding from owning land.  

In terms of the Act, foreigners, a company incorporated in Sri Lanka with direct or indirect foreign shareholding of more than 50% or a foreign company, are prohibited from purchasing State or private land (which includes any interest in land, land covered with water and houses or buildings standing on such land) in Sri Lanka with effect from 1 January 2013.

A purchase of land by a company incorporated in Sri Lanka with less than the said ceiling of 50% foreign shareholding is required to maintain such shareholding for a minimum period of consecutive twenty years from the date of the purchase. In the event the foreign shareholding reaches or exceeds such a ceiling, the transfer of land is considered void unless steps are taken to reduce such shareholding to the permitted limits within the time period specified in the Act.   

A few notable exemptions to the above restriction are purchases of condominium apartments, purchases by companies listed in the Colombo Stock Exchange with a foreign shareholding of 50% or more with effect from 1 April 2018, land which is transferred by intestacy, gift or testamentary disposition to a next of kin (who is a foreigner) of the owner, purchases by companies engaged in development projects identified as Strategic Development Projects in terms of the provisions of the Strategic Development Projects, Act No. 14 of 2008.

At the inception, the principal enactment of the Act also imposed restrictions on leasing land by foreigners by imposing a Land Tax which was payable at the point of execution of the instrument of lease. However, in terms of the Land (Restrictions on Alienation) Act, No. 3 of 2017 (Amendment Act), such Land Tax was removed in respect of leases by a foreigner, a company incorporated in Sri Lanka with direct or indirect shareholding of more than 50% or a foreign company with effect from 8 January 2017. However, the maximum tenure of such leases remains ninety-nine years and mortgages of such leasehold rights have also been prohibited in favour of banks, licensed under the Banking Act, No. 30 of 1988 for a period of five years from the effective date of the relevant lease agreement.

If any land is acquired in contravention of the foreign ownership restrictions imposed by the Act, such acquisitions are deemed void and any person contravening such restrictions shall be guilty of an offence.

Apart from the above legislation, foreigners should also be in compliance with foreign exchange regulations when investing in real estate in Sri Lanka as permitted under the Act, which require such investments to be made through an Inward Investment Account opened and maintained in any foreign currency approved by the Central Bank of Sri Lanka or Sri Lanka Rupee, with a licensed commercial bank in Sri Lanka.

The Act was introduced with a view to preserve national interest considering the scarcity of land in Sri Lanka, however as to whether it discourages foreigners from investing in Sri Lanka, which is currently crucial to our economy remains an ongoing debate amongst concerned parties. Therefore, a more pragmatic approach may be to revisit the said legislation and relax certain restrictions, particularly in the areas of industrial and commercial real estate, with a view to encourage foreign direct investment.